Feb. 14 (Bloomberg) -- The French economy shrank in the
fourth quarter and revisions put it in recession earlier in the
year as manufacturers slashed tens of thousands of jobs and
President Francois Hollande squeezed the budget deficit.

Gross domestic product dropped 0.3 percent in the fourth
quarter from the previous three months, national statistics
office Insee said today. Economists had forecast a 0.2 percent
drop, according a Bloomberg News survey. Insee’s revision of the
first-quarter 2012 performance to a -0.1 percent drop means
Europe’s second-largest economy dipped into recession in the
first half for the first time since 2009.

France, like others among the 17 nations using the euro, is
suffering in the wake of the region’s sovereign debt crisis. Yet
while neighboring Germany is showing signs of recovery in
confidence, exports and manufacturing, Hollande is grappling
with shrinking private investment, job cuts by companies such
Renault SA and pressure from European partners to speed budget
cuts and an economic revamp.

“Recent macro data suggest that France may be about to
significantly underperform the rest of the region,” JPMorgan
Chase economists David Mackie, Raphael Brun-Aguerre and Alex
White said in a note to clients. “While the rest of the region
looks to be stepping up at the start of the year, France looks
to be stepping down.”

In all of 2012, the France showed no growth, while Germany
expanded 0.7 percent. German GDP fell 0.6 percent in the fourth
quarter, the Federal Statistics Office in Wiesbaden said today.

Recession Expectations

Since then, manufacturing and services have been picking up
in Germany while dropping in France, according to the Purchasing
Manager’s Index. January’s flash PMI’s put the spread between
the countries’ service industries at the widest since the data
was first collected in 2006 and the difference in manufacturing
at the highest in almost two years.

French GDP has now recorded three quarters of declines
since emerging from the recession induced by the collapse of
Lehman Brothers Holdings Inc. at the end of 2008 and beginning
of 2009. Economists expect output to drop again in the current
period, putting France in recession, Bloomberg Surveys show.

Like about half the euro-area countries, France is “in
recession or quasi-recession,” Industry Minister Arnaud
Montebourg said today on Europe 1 radio. France is working to
“loosen the pace of austerity,” he said.

In the fourth quarter, a 1.2 percent drop in investment by
non-financial companies, as well as lower government spending,
meant domestic demand gave no lift to the economy, Insee said.
By contrast, net exports bolstered GDP by 0.1 percentage point.

Rising Joblessness

With jobless claims at a 15-year high and a trade deficit
that was the second-largest on record last year, Hollande has
pledged to shrink government spending by 60 billion euros ($81
billion) over five years, cut in payroll taxes and is ease labor
regulation in a bid to improve competitiveness.

Those efforts have been lauded by economists and
organizations including the European Commission and the
International Monetary Fund.

Even so, France’s Socialist government has his work cut out
if he is to reduce joblessness and exports by the time his
mandate runs out in 2017, economists say.

France’s share of European exports dropped to 9.3 percent in
2011 from 12.7 percent in 2000, while the share of manufacturing
in its economy has declined to 12.5 percent from 18 percent,
according to the government’s own estimates.

Target Struggle

Finance Minister Pierre Moscovici said yesterday that the
government may have to cut its growth forecast for 2013 and may
struggle to meet its target of reducing the budget deficit to 3
percent of GDP next year from 4.5 percent.

“France is in quite a unique position,” said Gilles Moec,
co-chief European economist at Deutsche Bank in London. “The
fiscal retrenchment is now reaching its peak while in most other
countries it was hit in 2011 and 2012. Plus the corporate sector
has been late in adjusting and that’s resulting in a steep
increase in unemployment.”

Jobless claims have increased for 20 straight months,
leaving more than 3 million people out of work, the highest
since January 1998. PSA Peugeot Citroen SA, Alcatel-Lucent and
Titan International Inc. are among companies reducing staff.

“Looking forward, the outlook remains grim,” said Joost
Beaumont, an economist at ABN Amro in Amsterdam. “Rising
unemployment and severe fiscal consolidation are the main
factors that will weigh on domestic spending. Although we expect
an improvement in global economic conditions will support
growth, France will probably benefit less due to its weak
competitive position.”

Hollande knows the turnaround won’t happen overnight.

The condition of France in five years is “the question
that matters in my eyes,” Hollande said Nov. 14 at the first
semi-annual press conference since he became president last May.
“I want to be judged, when the time comes, on employment and
growth.”